A Delaware judge has overturned Tesla CEO Elon Musk’s controversial $55 billion compensation package, prompting Musk to take swift action to move Tesla’s corporate base from Delaware to Texas. This dramatic ruling and response will have major implications for Tesla shareholders and the company’s future direction.
Judge Finds Compensation Package “Unfair and Unreasonable”
Vice Chancellor Joseph Slights III of Delaware’s Court of Chancery ruled on Monday that Musk’s pay package, approved by shareholders in 2018, was “unfair and unreasonable” to other investors. The package awarded Musk stock options based on hitting ambitious market cap and operational milestones.
Slights took issue with the size of the award and the lack of ongoing oversight by Tesla’s board over the package. “My mind is boggled by the magnitude of the award,” he wrote. While the package required Musk to hit ambitious goals, the size of the potential payout gave Musk motivation “to take excessive risks with the Company’s well-being,” Slights argued.
The lawsuit challenging the package was brought by Tesla shareholder Richard Tornetta in 2018. Tornetta, a heavy metal drummer, argued the package unjustly enriched Musk without requiring him to work at Tesla full-time. Slights agreed the pay was not justified by Musk’s part-time commitment to Tesla.
Musk Calls for Shareholder Vote to Move Tesla to Texas
Musk wasted no time responding to the rebuke from his home state’s courts. Within a day, Musk tweeted that he would ask Tesla shareholders to vote on moving Tesla’s corporate registration from Delaware to Texas, where it is building a new vehicle assembly plant.
Such a move would take Tesla out from under the oversight of Delaware courts, which have specialized business law expertise from handling most corporate disputes. Texas corporate law is considered more management-friendly.
| State | Corporate Law Reputation |
|---|---|
| Delaware | Shareholder-friendly, expert judges |
| Texas | Management-friendly, pro-business |
“The Delaware way has served shareholders extremely well for over a century,” said Columbia Law professor John Coffee in an interview. “If we move incorporation toTexas just so that management can be entrenched, that would be seriously criticised by institutional investors.”
What’s Next for Tesla and Musk
But some legal experts say Musk could still face challenges even if Tesla reincorporates. “A move would not affect the court’s jurisdiction over the 2018 compensation package,” Georgetown Law professor Donald Langevoort told MarketWatch.
And shareholder advisory firms like ISS and Glass Lewis may frown on such a blatant move to avoid judicial oversight. With the pay package in limbo, investors are also left wondering how Musk will be motivated and compensated going forward.
After losing his title as world’s richest person due to Monday’s ruling, Musk also has financial incentive to fight to restore some version of his massive pay package. But Slights gave strong indications that any similar compensation plan would face high scrutiny.
For Tesla, increased uncertainty around Musk could impact the stock price, which has been highly tied to investor confidence in Musk’s leadership vision. The coming shareholder vote on reincorporation will be closely watched as the next chapter in this corporate drama.
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